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Kemp and Reagan

What today's Republicans could learn from their relationship.

6:00 PM, May 5, 2009 • By DAVID M. SMICK
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When people picture Jack Kemp, the Republican congressman, cabinet member, and presidential candidate who died last week, they think of Ronald Reagan's sidekick. They envision the two men--a football player and an actor--enjoying a warm, cozy, political partnership that guided 1980s economic policy.

What I remember is just the opposite. Kemp was often a thorn in Reagan's side, a constant pest. The relationship nonetheless transformed GOP economic policy. More importantly, Kemp's populist, blue-collar influence on Reagan stands as a powerful reminder of how far today's GOP has strayed from its original mission.

I will always remember a taller-than-expected, rosy-cheeked Reagan in late 1979 barreling into a hotel suite at the Airport Marriott in Los Angeles. He was there to meet Kemp and his entourage for three days of discussions about fashioning a national economic recovery plan.

The 1970s stagflation and tax bracket creep had hit middle class families with the individual tax rates reserved for the super rich. Like today, average folk were financially suffocating.

Kemp's style in those meetings was aggressive. The young Buffalo congressman relentlessly attacked established GOP economic orthodoxy, which he argued ignored the tax code's assault on wage-earner income. One particular point of contention was Reagan's fixation on government waste, including his continual mention of the so-called Chicago Welfare Queen (a mythic figure who had collected 85 separate welfare checks). The impression Reagan left was that this pilfering was somehow to blame for America's ills, an absurdity.

Kemp insisted the country's most acute problem was a stifling and intolerable tax on labor. This was not a Wall Street issue, but a lunch pail issue. Kemp was less concerned with the cost of capital than with the cost of groceries. With his own streak of blue-collar populism, Reagan saw the same vision, and the rest is history. The combination of Fed Chairman Volcker's aggressive monetary policy and the Reagan-Kemp individual tax cuts, was followed by a period of robust growth and job creation.

This economic platform produced three quick GOP presidential victories--1980, 1984, and 1988. The question is why ever since the tax cut issue has been such a loser for GOP presidential candidates. What did an actor and a football player know that made them so successful?

Here's a clue: Reagan and Kemp acknowledged the importance not only of physical and financial capital, but of human capital. For decades, GOP policymakers worshipped at the shrine of generous tax treatment for machinery. Kemp and Reagan realized that for the economy to prosper in the long term, the tax code must not value machinery over people. Workers and investors must be treated equally. The Reagan Democrats and independents found this new-found GOP concentration on middle class financial angst appealing, and helped the GOP achieve a majority vote in successive elections.

To be fair, today's Republicans are a victim of the GOP's earlier success in defeating stagflation, indexing the tax code, and relieving the tax burden almost entirely for a lot of lower-middle class earners. That has left Republicans repeating the self-defeating mantra that the top 40 percent of income earners pay 90 percent of federal income taxes. True, but that's also the heart of the GOP political problem. For the other 60 percent of Americans, federal income tax cuts are no longer that meaningful.

Unlike Kemp and Reagan in the 1980s, Republicans have not found a positive solution to their political predicament. For example, until the current financial crisis, the U.S. economy produced unprecedented levels of wealth. What is surprising is how little the GOP did to try to enlarge the base of capital ownership. Kemp and Reagan would have suggested reform of the entire tax code. Why? Because in an expanding globalized economy of appreciating financial assets, mere wage earners find it difficult to keep pace.

Some Democrats including Bill Bradley and Hillary Clinton chose the approach of establishing birthright investment accounts for newborns to create a new generation of mini-capitalists.

The point is that the GOP seemed oblivious that Americans yearn to be transformed from labor workers into capital owners. They failed to realize the need for some connective mechanism so a large segment of society could personally benefit from the market economy.